Anaya Nolan
A choice-of-law provision, also known as a governing law clause, is a provision in a contract that determines which laws will be applied to interpret the agreement and resolve disputes. These provisions are intended to create clarity and consistency in legal interpretation and enforcement of contracts. They are usually included in contracts with connections to multiple jurisdictions to reduce legal uncertainty. While drafting choice-of-law provisions, it is important to consider the scope to clarify whether it covers only contract-based claims or extends to non-contractual but related claims. Choice-of-law provisions can be waived under specific circumstances, such as when the chosen state's law conflicts with substantive rights protected by the forum state's laws. Additionally, litigants may choose to waive the choice-of-law provision and ask the court to apply the forum law for various reasons, including ignorance, irrelevance, or convenience.
| Characteristics | Values |
|---|---|
| Purpose | To reduce legal uncertainty by selecting a law to govern the agreement between the parties |
| Application | Determines the governing body under which the contract falls |
| Scope | May include non-contractual but related claims, such as tort or statutory law |
| Interpretation | Courts should always apply the law of the jurisdiction selected in the clause |
| Jurisdiction | Where a dispute will be resolved |
| Governing Law | Indicates which state's law will be used to decide the dispute |
| Forum | Identifies which courts will preside over contract adjudication proceedings |
| Jury Waiver | May be included as the last provision of the agreement |
| Mandatory Nature | Should be made clear with the use of "shall" instead of "may" or "will" |
| Waiver | Cannot be made unilaterally; if one litigant argues for another jurisdiction, the issue must be addressed by the court |
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What You'll Learn
Choice-of-law clauses
The purpose of a choice-of-law clause is to reduce legal uncertainty by prospectively selecting a law to govern the agreement between the parties. Choice-of-law clauses also reduce the cost of dispute resolution by making it unnecessary for the court to conduct a choice-of-law analysis should a dispute wind up in litigation. The parties irrevocably consent to the jurisdiction of, and venue in, such courts and waive any objection that such courts are an inconvenient forum.
When a contract has no choice-of-law provision and litigation ensues, the judge, not the parties, decides which state's law will apply. In making this decision, the court may look to see how the object of the contract and its performance relate to the state within which the litigation was brought. This court-based analysis is called a "conflicts of laws" analysis, and the potential risks and inconsistencies posed by letting the court decide is why parties may lean toward a choice-of-law provision.
When choosing courts in the U.S., it is best to avoid limiting the choice to a federal court. In the U.S., the state courts are courts of general jurisdiction, whereas federal courts have limited jurisdiction. In brief, a federal court has jurisdiction in civil cases only if the claims arise under federal law or are between parties of completely diverse citizenship. Ordinary contract claims do not arise under federal law, and diversity jurisdiction is not always available.
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Jurisdiction
When selecting a jurisdiction, it is essential to consider the laws of the chosen forum. While a choice-of-law provision can be included in the contract to specify the governing law, courts may still apply the law of the forum state, particularly in federal courts with limited jurisdiction. In the United States, state courts have general jurisdiction, while federal courts have limited jurisdiction, hearing cases only when claims arise under federal law or involve parties of diverse citizenship. Therefore, when choosing a forum, it is advisable to avoid limiting the choice to a federal court to prevent potential issues with jurisdiction.
To ensure the enforceability of the chosen jurisdiction and governing law, careful drafting of the choice-of-law provision is crucial. The provision should be mandatory and exclusive, clearly stating that disputes "shall" be heard in the selected forum "to the exclusion of all other courts." Additionally, the chosen jurisdiction should have a substantial relationship with the transaction or the parties to enforce the clause effectively.
In some cases, litigants may choose to waive the choice-of-law issue and ask the court to apply the forum law. This can occur due to ignorance, irrelevance, or cost considerations. However, if either litigant argues for the application of another jurisdiction's laws, the court must address the issue. Therefore, a thorough choice-of-law analysis is essential when there is a conflict between the laws of two jurisdictions.
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Contract disputes
A "choice of law" provision in a contract allows the parties to agree that a particular state's laws will be used to interpret the agreement, even if the parties live in or the agreement is signed in a different state. This is also referred to as a "governing law" provision. Choice-of-law provisions are included in contracts to reduce legal uncertainty by selecting a law to govern the agreement between the parties. They also facilitate settlement by identifying the law that will be applied to resolve any potential dispute.
In the US, state law usually applies to determine the existence, performance, and remedies for breach of contracts. However, the specific language used and the object or purpose of the contract may be interpreted differently from state to state. This can pose challenges for contracting parties when courts are called upon to interpret and enforce a contract's terms, especially when the parties and the contract have connections to multiple states.
In some cases, litigants may ignore the choice-of-law provision and instead brief the court of the law of the forum. This is because, in some cases, applying the chosen state's law may cause a waiver of substantive rights protected by the forum state's laws. For example, laws regarding required financial disclosures and certain consumer protection statutes may invalidate a choice-of-law provision if it would cause a waiver of those protections.
Additionally, some contracts may include a jury waiver in the section that includes choice-of-law provisions. Most states will enforce jury waivers in commercial contracts, but there are exceptions, such as California, which holds that parties may waive their right to a jury trial only after a lawsuit has been filed.
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Jury waiver
A jury waiver provision is a contractual clause in which one or both parties agree to waive their right to a jury trial, opting instead for a bench trial as the default process for resolving disputes under the contract. Jury trials can be costly and time-consuming, and juries are perceived as more likely to award large sums in damages compared to judges. As such, jury waiver provisions are commonly included in contracts.
> "Each of Guild Parties and Buyer hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement, any other Principal Agreement or the transactions contemplated."
> "BORROWER, ADMINISTRATIVE AGENT AND EACH LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY in any suit, action or proceeding arising out of or relating to this Amendment."
> "Seller hereby irrevocably and expressly waives all right to a trial by jury in any action, proceeding, or counterclaim (whether based upon contract, tort, or otherwise) arising out of or relating to this agreement or any other warehouse document or the transactions contemplated hereby or thereby or the actions of Bank in the negotiation, administration, or enforcement thereof."
When drafting a jury waiver provision, it is important to ensure that it is placed in a prominent position within the contract, such as on the same page as the signatures, to minimize the argument that it was overlooked. Additionally, when choosing courts in the U.S., it is advisable to opt for state courts over federal courts, as the former has general jurisdiction, whereas the latter has limited jurisdiction.
It is worth noting that a court may find that a jury waiver in a contract does not extend to extra-contractual claims, such as fraudulent inducement. Nevertheless, this potential exception should not deter the inclusion of a jury waiver if it is deemed desirable.
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Scope
The scope of a choice-of-law provision can vary depending on the specific language used and the jurisdiction in which it is being applied. In general, choice-of-law provisions are included in contracts to create clarity and consistency in the legal interpretation and enforcement of the contract across different jurisdictions.
Some choice-of-law clauses state that the agreement shall be "interpreted", "construed", or "governed" by the law of the chosen jurisdiction. While most courts have held that the specific word choice does not matter, a few courts have held otherwise, interpreting "governed" to signal the intent to select all of the contract law of the chosen jurisdiction. This variation in interpretation highlights the importance of carefully drafting the choice-of-law provision to ensure the intended scope is achieved.
The scope of a choice-of-law provision can also depend on whether it covers only contract-based claims or includes non-contractual but related claims. For example, if a contract dispute involves non-contractual claims, the court may undertake a conflicts-of-law analysis to determine whether the forum's laws or another state's laws apply to those non-contractual claims. Therefore, parties should carefully consider the intended scope of the provision before deciding on the specific language to use.
Additionally, the scope of a choice-of-law provision can be limited by certain laws and statutes. For instance, laws regarding required financial disclosures and consumer protection statutes may invalidate a choice-of-law provision if it would result in a waiver of those protections. Similarly, the scope of the provision may be impacted by the specific laws of the chosen jurisdiction, such as whether the jurisdiction treats statutes of limitation as procedural or substantive law.
In the context of international disputes, the scope of a choice-of-law provision can be influenced by the laws and interests of multiple jurisdictions. For example, in a case involving parties from different states or countries, the court may consider the place of contracting, the place of performance, and the interests of the respective states in determining the scope of the applicable law.
In summary, the scope of a choice-of-law provision can vary depending on the specific language used, the jurisdiction, and the nature of the claims involved. Careful consideration and drafting of the provision are essential to ensuring that the intended scope is achieved and potential legal barriers to enforcement are addressed.
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Frequently asked questions
A choice-of-law provision, also known as a governing law clause, is a provision in a contract that determines which laws will be applied to interpret the agreement and any disputes that may arise.
Choice-of-law provisions are intended to create clarity and consistency in the legal interpretation and enforcement of contracts. They can also reduce the cost of dispute resolution by removing the need for a court to conduct a choice-of-law analysis.
Yes, litigants can waive a choice-of-law provision and ask the court to apply forum law instead. This happens when both parties tacitly agree to apply the law of the forum by declining to raise the choice of law as an issue.
Choice-of-law provisions may be ignored when applying the chosen state's law would cause a waiver of substantive rights protected by the forum state's laws. For example, some states have enacted statutes that make a choice of another state's law unenforceable if it would "vary a statute, administrative rule, or regulation that may not be varied by agreements under the [forum state's] law".
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